By the end of 2004, almost 14 trillion frequent flyer miles had been accumulated worldwide, worth between 1p and 6p apiece.

According to a new analysis by The Economist magazine, the global stock is worth more than $700bn (£370bn), more than all the US dollar bills in circulation, and streets ahead of Britain's £42bn of notes and coins.

I must have unusually strong liquidity preference, because I can't stand frequent flyer miles. What I hate most is when I wind up stuck at a dinner table between two people comparing their strategies for accumulating miles. Toenail fungus would be a more interesting topic.

Speaking of unnecessary administrative overhead, my new pet peeve is mail-in rebates. I just got some "free" stuff with a new computer--that is, "free" with mail-in-rebates. For some reason, each item has two rebates--how I am I supposed to send the original copy of the UPC sticker to two addresses in two different states? And they all require a copy of my store receipt, my phone number, my email address, my children's birth certificates, 3 cereal boxtops, and my grammar school transcript.

My new rule is this: never accept anything with a mail-in rebate that you would not be happy to buy without any rebate. That way, if the rebate actually were to arrive, it would feel like a...well, like a rebate.

For Discussion. Is the large volume of frequent-flyer miles outstanding an indication of their value--or the lack thereof?

The large number is probably more indicative of their lack of liquidity than anything. Even when you have enough miles to get a flight, there are so many blackouts as to make them effectively useless for anyone who isn't flexible (i.e. retired or unemployed).

I have some experience with billing systems, and I am pretty sure all the major frequent flyer programs are horrendously expensive to administer, given their complexity. I am sure the labor involved in processing mail-in rebates is also quite costly, more so than the rebate amounts themselves in most cases.

For a nation of supposed spendthrifts (I'm talking about the U.S. here) there is evidently something we can save. I agree that it's partly due to the illiquidity of miles, as well as the automatic way in which they are awarded, without any extra effort required on the part of the consumer. And they don't depreciate (at least not in nominal terms). Maybe we could design a similar retirement savings program: companies could award somewhat illiquid "retirement points" with purchases, exchangeable for benefits at some future date.

"how I am I supposed to send the original copy of the UPC sticker to two addresses in two different states? "

You're not supposed to, of course.

I just bought a copy of Norton Antivirus 2005. On the lable in big red letters is "$20 OFF!" followed by...

"from mailing in coupon with proof of prior purchase of a competitor's product, a losing ticket from the June 2002 Powerball lottery, and a copy of your maternal grandmother's birth certificate proving show was born in Norway."

The result is that they get to print "$20 OFF!" on the label, which gets you to walk over and pick up the product, with precious little chance that you will take the $20 off.

Great point F. Fuente! We should add our share of the global stock of frequent flyer miles to HH savings estimates.

On a more serious note. I agree that the accumulation is largely a function of liquidity. I have balance of over 250K United miles (and have accumulated a total of around 350K with United alone). Almost all of my usage has been on upgrades to Business (plus a flight).

Differential pricing Arnold. Rebates are the Staples version of the grocery store club card. I suspect they have smart people with operations research training tuning the PITA factor of their rebate programs to maximize revenue/sale.

Not a big fan of miles either, especially when one of my credit cards (citibank) gives back 1% cash for anything and 5% on groceries and gas, and the other (amex) gives 1.5% cash on all purchases. I'd rather have the $500/year (and no yearly fee).

Clearly, it represents their lack of value. In the simplest form, each frequent flier mile represents a claim on a fraction of an airline seat.

However, the airlines, like a drunken central banker, just mint miles, hand them out to people who are angry, issue more and more for various promotions, etc.

At the same time, the number of seats available for redemption using those miles is even decreasing, as the major airlines actually reduce capacity, cutting service and using smaller planes.

So, each mile actually represents a smaller and smaller fraction of a seat. The "value" of 1p to 6p is a fiction contrived from the price of actual paid tickets.

But in order control allocation of the increasingly-scarce frequent-flier seats, the airlines institute tighter rules, or simply don't have them available, certainly not on dates and times that you'd actually want to fly.

Increasing illiquidity is how the value of your miles goes down with respect to the goods they can be exchanged for. That is, illiquity is the "inflation" of the miles currency.

I just got some junk mail from American Airlines that is new to me -- rather than third-party merchants offering to give me miles, they now want to take my miles -- in this case for magazine subscriptions (e.g., a year of Wired for 500 miles, six months of Forbes for 1,400 miles, two months of the Wall Street Journal for 1,200 miles). So one now wonders: is American buying those miles back from the magazine merchant? Might American or another airline take the next logical step and simply offer to cash out frequent fliers (e.g., for perhaps one or two cents per mile)?

Arnold, I also seem to have strong liquidity preference. I have come to consider my time too valuable to be strategizing about ways to increase my frequent flyer miles. Likewise with rebates, though I do tend to use those more, probably because the threshold for cashing-in miles is so high, and being a computer programmer I end up buying a lot of equipment which offer rebates of $50 and greater.

But I don't think higher liquidity preference really explains your opinions. I believe you are just smart with your money and probably fairly well-off financially. You're an economist for crying out loud. You just might be removed from the concerns of the masses and underclasses. You seem to forget that these "psuedo-currencies" are actual currencies. Rebates, coupons, and sale-prices are the only tangible way for most consumers to exert some control over prices, which in most other regards are controlled by the seller/manufacturer.

I am no economist but I think you're shortchanging the important phenomenon, namely "alternative currencies". They are not psuedo as you claim, in fact their value is often more tangible than that of a stock market that is grossly overvalued. A two-hundred and fifty dollar rebate check in the hands of Joe Sixpack will often move around a lot more tangible goods than a million dollars in the hands of an internet-bubble billionaire. Maybe that's not a great example but do you see my point?

I have a US Air credit card. I accumulated 200,000 US Air miles. I think I was saving them for some big trip to Europe. I did it because I felt I was leaving money (credit card miles) on the table. Then US Air Chaptered.

No one knows whether US Air is going to join Eastern, Pan Am, TWA and Braniff in Airline Heaven. If they do, it is likely that the US Air FF miles will be unsecured debts of the liquidated airline and will be worth FFN (Flat F#$%*&^ Nothing).

So I started to use the miles. My wife used 80,000 to fly to Philadelphia for a convention. Nominal value at 2 cents/mile, $1600 after tax cost of a cash ticket $300. My daughter used 80,000 to fly to LA for an interview. Nominal Value $1600, cash cost of comparable ticket $400. I flew to New York. So now we have a balance of 40,000 miles, which I hope to use soon.

I feel much better about my 300,000 miles on American Express, because I they are obligations of American Express and I owe them more than they owe me.

Might American or another airline take the next logical step and simply offer to cash out frequent fliers (e.g., for perhaps one or two cents per mile)?

I wouldn't hold my breath. I wonder, though, what kind of discount they would give you if you agreed not to take any miles. Suppose you take a 1000 mile trip. Would they knock $10 or $20 off your fare? Or $5?

There are 3rd party ways to buy tickets that don't get frequent flier miles. Does anyone know anything about them?

As for rebates, I'm with Brad. Looks like price discrimination to me. Not everyone is going to go to the trouble of claiming the rebate, which is made unnecessarily complicated, I suspect.

Staples in my area actually sells some goods for the value of the rebate. In other words, they are free if you send in all the forms and receipts and whatnot.

Agree with Bernard RE Kip's comment. But miles are price discrimination too - the value of the "discount" on future flights is correlated with how flexible you are, which (I'm guessing based on airline pricing schemes) is correlated with willingness to pay. Also, you notice that the offers that Kip is getting are all for media products that gain value from additional circulation (higher ad rates). Getting a few more WSJs into FFs' hands has to be a low cost way of burning up miles.

I'm a rebate-a-holic. The size of the rebate will definately influence whether or not I purchase the thing. Bigger rebates are more valuable than the effort to file the paperwork. I track my rebates in my PFM software and keep photocopies of everything I send in. In all of the years that I've been doing this, I have never once failed to receive a rebate.

My assumption is that the vast majority of rebates never get filed, and that the price before rebate subsidizes the rebates. In other words, if you don't fill out the rebate, you're paying more so that my rebate can be fulfilled. It's almost like a voluntary tax. Most of you are subsidizing me, at no value to yourselves, and you're happy about it.

I'm happy about it, too. You have fully subsidized the purchase of my state tax software and PFM software for the last several years. Not to mention hard drives, USB drives, wireless devices, RAM, etc. You guys are great! Thank you!

And frankly, I don't want the rebate filing process to get too easy. If that happens, everyone will start filing them, and they'll start to go away. This will be good for most people, but bad for me. All of the stuff that I currently get free (after rebate) will start costing me money.

First of all the amount of unused frequent flyer miles represents the accumulated switching costs of the programmes members. Whether this amount has a comparable pecuniary present value for all of the members is another question. Remember that miles earned today are usually too low to redeem a trip the same day (for obvious reasons), thus you have to talk about present values when you want to assess the value of frequent flier miles for the programme member.

The value of a frequent flyer mile must have a relative value equal to or more than the equivalent value in cash, if not a value of zero in cash would have no effect on consumer choice.

As such the accummulated value in cash of miles may very well be larger due to consumer subjective valuation of the miles being equal to or greater than the relative value of miles.

You could also take a cost approach on the matter. The accumulated points illustrates the relative excess profit hold by airlines not yet redeemed by the programme members. If miles create switching costs, airlines are able to increase prices excessively and earn an excess profit if the consumer subjective valuation of a frequent flier mile is greater than the marginal cost of having a frequent flier programme for the airline. Taking this approach it should be obvious to everyone that the airlines have incentives to make it as difficult as possible for the consumer to redeem accumulated points, but at the same time promote the programme membership as having huge benefits to the member.

If anyone need links to relevant litterature on the question, just ask, or start by searching the litterature made by Paul Klemperer on switching costs, (or my own though it is in Danish, :)).

According to Gresham´s Law, the accumulated currency (i.e. airmiles) is the good currency.

Cute, but no cigar. Gresham's Law only applies when the exchange rate between the two currencies is fixed. However, the dollar value of frequent flyer miles is quite flexible. People can buy frequent flyer miles not only at different prices when they book airfares, but also at different prices via their credit card award conditions. Frequent flyer miles can be conferred or traded to others by various means, some legitimate (family), some less so. Basically, though, their good or bad aspects as money are not relevant because both currencies, to the extent frequent flyer miles are money at all, can exist side-by-side precisely because they exchange at flexible rates.

If frequent flyer miles go out of existence, it will be because they are no longer a profitable marketing program for the airlines, and not because of Gresham's Law.

From a marketing (rather than an economic) point of view, the purpose of the original miles programs was to build customer loyalty. For me and others the value was not so much the free trips or upgrades (although I have used both) but privileges such as using First Class check-in lines and early boarding for the Gold/Platinum card (requiring so many miles per year). When, years ago, American began denying this early boarding privilege on some flights on the excuse they were too full (why do they think we want to board early?) I began to question the whole system. In flying other airlines as a nebbish I found the their treatment of me was not really different than I had as an American card-holder. So I fly any airline now, and only rarely American.

From an economic point of view, American (and others) cheapened the value of the miles by making them available to persons other than frequent American flyers. The increasing difficulty of trading the miles for flights is a result of selling miles in blocks to credit-card companies, etc. so that American no longer had a way to reward their frequent flyers. Like the other airlines, they depreciated the only currency they had.

I'd have to say that the outstanding volume indicates that their worth is less than the effort to redeem them. After all, one doesn't accumulate them in enough desnity to make it an immediate reward, so delayed gratification takes some of the value away in the average person's assessment, because it may take them several years to accumulate enough to redeem, and they may actually expire before they accumulate enough. Then the bureacractic hassle in actually uses them confuses enough people to set the bar higher than they are willing to pay. And the limitations on black-out dates etc. means that people can't even use them exactly when they want, and they may not fly much at other times when they could use them.

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